Could ITM Power Plc (LSE:ITM) shares ride with the global journey towards net zero in the United Kingdom?

Net-zero has been a buzzword used by companies, policymakers, governments, and international organisations. In the world’s drive towards controlling climate change, businesses and governments worldwide are turning to renewable energy as a more sustainable energy source.

In my opinion, ITM Power has positioned itself to benefit from the push toward renewable energy, but does that make its shares a good investment?

Key points

• The renewable energy market size is expected to reach $1.97trn by 2030.
• ITM Power’s Electrolyser technology has a competitive advantage. 
• The company completed the world’s first electrolyte Gigafactory. 

The business model

The firm is engaged in designing and manufacturing integrated hydrogen energy systems based on Proton Exchange Membrane (PEM) electrolyser technology. And it offers a product that is scalable above 100MW in size.

The electrolyser manufacturing company’s technology can extract hydrogen from water with no greenhouse gas emissions. So, it’s not surprising that it’s globally recognised as an expert. The group’s mission is to help directly feed clean, renewable energy into the power grid through its green hydrogen through three primary channels:

• Power to Gas
• Clean Fuels
• and Industrial Hydrogen.

The demand for ITM Power’s electrolyser technology has grown tremendously over the years. Needless to say, the hydrogen sector is poised to grow further with the 2050 deadline set by most organisations and governments for a net-zero economy.

The company generates revenue through the following means.

• Selling of the PEM electrolyser systems
• Consulting contracts
• Maintenance contracts
• and Selling of fuels and other products.

So, how have ITM Power shares performed?

ITM Power stock performance

The renewable energy sector has suffered heavily since the start of the Covid-19 pandemic. And the ITM power share price is no exception, as the stock has not delivered the best returns in the last few months.

Today, it’s trading at around 75p. But it was only January 2021 since they were priced well-above 700p. Things turned around shortly after the stock peaked and has been on a downward trajectory.  In 2022 alone, the stock slumped 76.74%. The stock has fallen another 17% this year. Does this offer a good bargain, or I should avoid the stock?

But if one stresses the period to the last five years, ITM Power’s share price has increased by more than 117%. So, is the recent tumble a buying opportunity for my portfolio? Let’s pause and take a look at the 2022 financial year results first.

RELATED: Thinking about investing in hydrogen stocks? Read this first!

ITM Power 2022 FY results

The energy storage and clean fuel group’s fiscal year spans from April to April, and in September 2022, it released its 2022 results. And I think it’s fair to say that investors were not pleased as the stock experienced a 26% sell-off in one day!

What happened? The company reported a gross loss of £23.5m compared to £6.5m a year ago, with its adjusted EBITDA loss figures coming in at a whopping £39.8 versus £21.4m in 2021. In other words, earnings still seem far away.

Supply chain disruptions caused more delays for its 24MW electrolyser Leuna contract. And consequently, while up on a year-on-year basis at £5.6m, the group’s revenue fell significantly short of analyst expectations of £8.7m.

This isn’t the first time production delays have plagued this hydrogen business. And it seems investors are getting fairly impatient, resulting in many jumping ships causing ITM Power shares to tumble.

Interim results for the six months to October 2022

The results of the company’s most recent results are not so encouraging, at least to me. Here are some of the numbers worth noting.

• Revenue for H1 2023 was £2.0m compared to £4.2m for the same period last year.
• The company reported an Adjusted EBITDA loss of £54.1m compared to a £12.9m same period before.
• While net cash at the end of the H1 2023 of £317.7m (H1 2022: £164.2m)

The drop in revenue was because the Majority of Leuna project revenue was deferred due to delays and a changed delivery model. Aside from the above, the company signed two 100MW contracts with Linde Engineering. 

In the words of CEO, Dennis Schulz,

“The market for green hydrogen is real, driven by climate change and decarbonisation imperatives. Increasing carbon taxation in combination with green funding programmes make previously unattractive business cases viable. Recent energy independence considerations are further fuelling demand growth. However, peak electricity prices and inflation have temporarily slowed down customer investment decisions. This gives ITM time to have the breathing space required to focus on getting the fundamentals of the business in order, while delivering on our contractual customer commitments.“

“Our detailed 12-month plan will make ITM a stronger, more focused and more capable company. The large-scale opportunities in the market are yet to come, and by putting these foundations in place ITM will be ready for the significant market demand ahead of us.”

With its recent performance, is the long-term bull case for this stock still intact?

The bull case for the ITM Power shares

It’s worth noting that ITM Power has been quite busy recently. Here are some of the recent developments within the company;

• The group had the first full year of its strategic partnership with Linde. The partnership allows ITM Power to focus exclusively on manufacturing electrolysis equipment for large-scale systems to produce renewable hydrogen. 
• It completed the world’s first electrolyte Gigafactory. By the end of 2023, the factory is expected to produce 1,000MW per annum as production capacity continues to increase.
• ITM completed the installation of the 10MW REFHYNE I project with expansion by 100MW planned for REFHYNE II at Shell’s Rhineland refinery. 
• It sold the world’s largest PEM electrolyser to Linde.
• The company also sold the first MW-scale electrolyser to Sumitomo to be deployed in Japan.
• ITM Power raised £250m in November 2021 to principally expand its manufacturing capacity to 5GW by December 2024.
• The UK government announced the world’s first clean-hydrogen scheme targeting 10GW by 2030

Aside from the above, the firm equally received rounds of funding to expand its works. While this has not yielded instant results, I see it as ITM making enough statements in preparation for future demands for ITM’s electrolyser technology. Interestingly, the renewable energy market size is expected to reach $1.97trn by 2030. Needless to say, ITM Power shares could explode as the business generates more revenue and subsequently becomes profitable.  

Risks factors

As encouraging as the group’s progress has been, it’s not without its risks. It remains entirely possible that another disruptive alternative energy technology could emerge that could render the group’s PEM electrolysers obsolete.

But even if that’s not the case, the firm’s valuation is currently being driven by expectations of future performance rather than underlying fundamentals. Management does have a good chunk of contracts being negotiated that could deliver on these expectations. But there is no guarantee that it will lead to revenue, especially if competitors come in to try and take advantage of the group’s sizable order backlog.

In this scenario, I wouldn’t be surprised to see ITM Power shares endure quite a sharp drop.

Should I buy ITM Power shares?

Considering that the company has a competitive advantage with its proprietary technology, I see the stock as a potentially solid long-term investment. However, the seemingly continuous delays in contract fulfilment are getting concerning.

It’s possible that if ITM Power continues to run into trouble for the foreseeable future, customers may start cancelling their orders and looking elsewhere for hydrogen energy solutions. With that in mind, I’m keeping this stock on my watchlist for now and will be keeping a close eye on future developments.

Learn more about ITM Power

• The ITM Power share price has crashed. Time to invest?
• Hydrogen vs Electric vehicles: The battle for supremacy

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.